Monthly Saver For A Pension?

MONEYBUG_2

HELLO!

I'm 28 and I've started saving for my retirement (a bit late I know!). Only thing is all this pension talk bores and confuses me. So........ last year I set up a Derbyshire Regular Savings account which I put £50 a month into.

I have an ISA in which I put savings for my travelling. As I wanted to keep my travelling money and my pension money seperate, I decided to open the Derbyshire.

Am I doing a stupid thing or should I set up a proper pension?????

Ta!

MX

Bun

Set up a pension!At the very least you are missing out on the tax back from the government which will be at least 15ish pounds per payment (if I remember from mine. More experienced people will be able to help but you will miss out on a great deal of money.

dunstonh

£50pm net would be £64.10 gross into a pension.

Often a combination of savings (ISAs and pensions being the main two) is desirable. However at age 28, the tax relief is quite valuable to you as you get growth on that free money for the next 30 years. You dont get that with an ISA.

EdInvestor

dunstonh wrote:

However at age 28, the tax relief is quite valuable to you as you get growth on that free money for the next 30 years. You dont get that with an ISA.

But you then have to pay tax on 75% of the pension when you take it as income, whereas the ISA money can be taken tax free.And of course once you put money in a pension, it's out of your control forever.

IMHO basic rate taxpayers should avoid personal pensions unless they have a contribution from their company.The benefits are clearer for high rate taxpayers.

Though there might be an argument for contracting out under the new rules, especially if the Givernment increases the rebates.You have no choice about paying NI so you might as well have that money - at least you'll now be able to get 25% of it in cash.

dunstonh

But you then have to pay tax on 75% of the pension when you take it as income, whereas the ISA money can be taken tax free.And of course once you put money in a pension, it's out of your control forever.

You dont pay tax on 75% of the pension income. You pay tax on the amount that is above your personal allowances. These are increased at age 65. You can earn £14,000 a year as a couple without paying tax with the correct planning.

An ISA does not get tax relief on the contributions and would not benefit from the growth on that tax relief. Remember the goal is to provide an income in retirement. The pension does that.

As you get closer to retirement, then the pensions are less attractive and the ISA becomes more attractive.

Michel_Z.

The best thing is as mentioned before to contact a financial institution who deals with pension plans & set up a decent pension plan.

MONEYBUG_2

dunstonh wrote:

An ISA does not get tax relief on the contributions and would not benefit from the growth on that tax relief. Remember the goal is to provide an income in retirement. The pension does that.

.

Thanks so much all of you for your help!

Just wondered what you mean by an ISA not getting tax relief on the contributions?? (sorry if I'm a little dumb - all this pension stuff baffles me!)

If you get 25% of your pension in a lump sum when you retire, then what happens to the rest of the money if say you die a couple of years after your retire??

MX

Paul_Herring

MONEYBUG wrote:

Just wondered what you mean by an ISA not getting tax relief on the contributions?? (sorry if I'm a little dumb - all this pension stuff baffles me!)

The money you put into an ISA comes (usually) from your wages, which you receive net of tax - i.e. you've already been taxed on it. Money put into a pension scheme gets the tax rebated.

If you get 25% of your pension in a lump sum when you retire, then what happens to the rest of the money if say you die a couple of years after your retire??

If used to purchase an annuity, the annuity company keeps it. I beleive there are other ways of using the 75% (drawdown seems to ring a bell) but I'll leave that to DD or Pal to explain.

dunstonh

Not much left to explain there Paul.

I will just put some figures as examples.

If you pay £50 into an ISA, £50 goes in. If you pay £50 into a pension, the Govt increase it to £64.10. This is called tax relief and is currently 22%. (Higher rate tax payers can get 40% in total).

So, pay £50pm for 30 years and £18,000 goes into an ISA. Pay the same amount into a pension and its £23076 that has gone in because the Govt has given that tax relief.

Both an ISA and a Pension have tax free growth so no difference there.

When you retire, the pension matures. The maturity allows you to take 25% as a tax free lump sum. The other 75% purchases an annuity. The annuity company keeps that 75% and you never see it. However, in return they give you income for the rest of your life. I did an annuity this morning for a small pension fund and the annuity rate was 6.62% for a 62 year old male non-smoker. Smokers and poor health can get more. The older you are, the better the annuity rate as well.

MONEYBUG_2

Wow - thanks Dunst & Paul for setting it all out in simple terms - just what I need!

Couple of questions...

The Annunity rate - is that the interest rate you receive on the Annunity? Or is it the rate at which you receive the Annunity?

I just don't like the thought of my money being tied up like that after I'm retired. And just the thought of when you die you lose your Annuity worries me a little.

Thanks for explaining all about the tax relief!

What's a Drawdown?

you've all been a great help x

MX

Paul_Herring

MONEYBUG wrote:

The Annunity rate - is that the interest rate you receive on the Annunity? Or is it the rate at which you receive the Annunity?

From what I can gather, it's the percentage of the capital you receive in the first year. So, for example from a random table at http://www.uk-annuity.com/annuity_rate.htm £100,000 would get a 55 yr old single male £5,770 a year (without increasing) from L&G (first column at the top) - this equates to 5.77%. The older you are when you start collecting, the more you'd get, the more likely you are to die sooner (smoker, ill health etc.) the more you'd get. If you want a pension that increases year on year, the less you'd get. If you want to support a partner, the less you'd get.

MONEYBUG wrote:

What's a Drawdown?

http://www.fool.co.uk/pensions/articles/drawdown.htm